China Inc. `Bleeding' From Yuan Devaluation Seeks Hedging Help

  • KVB Kunlun Global Capital says hedging rose over 50% this year
  • Many firms `are bleeding after the shock devaluation:' Zheng

Chinese companies are seeking hedging services like never before after the yuan slid to a five-year low earlier this year.

Financial service provider KVB Kunlun Global Capital Ltd. forecasts its foreign-exchange hedging business will double this year, as fears of further yuan drops linger even after the currency rebounded in recent weeks. Hedging volumes at the firm jumped more than 50 percent in January-February from a year earlier, the sharpest two-month increase ever. Business also picked up at banks such as BNP Paribas SA, Hang Seng Bank Ltd. and Bank of China Hong Kong Ltd.

The yuan devaluation in August signaled an end to a decade of strengthening that had encouraged Chinese firms to become Asia’s biggest dollar borrowers and to largely ignore protection against exchange-rate reversals. A 4.4 percent tumble in the currency in 2015 caught out some companies, including developer Country Garden Holdings Co., which reported a 1.64 billion yuan ($253 million) net FX loss on financing activities in the year.

“Many Chinese companies are bleeding after the shock devaluation of the yuan in August,” said David Zheng, global dealing manager at KVB Kunlun Global Capital. “Although the yuan rebounded recently, more companies now believe the currency can go either way instead of just moving in one direction up as before.”

"Country Garden will continue to cut dollar exposure and use local financing for local projects," the company said in an e-mailed reply to questions. "Besides that we have done some FX hedging deals for renminbi/U.S. dollar borrowing.”

Greenland Hong Kong Holdings Ltd. said this month it has entered into forward contracts of $100 million to protect itself against yuan-dollar currency risk. China SCE Property Holdings Ltd. is in close contact with banks for potential FX hedging and will “take action at the right time,” the developer’s finance controller Paul Li told a March 18 briefing.

“Our FX hedging business has risen a lot this year, mainly the dollar-yuan pair, because Chinese companies are more eager to do FX hedging due to the volatility in the yuan and potential future depreciation pressure,” said Frank Kwong, head of primary markets for Asia Pacific at BNP Paribas in Hong Kong. “We see some issuers that may want to redeem their dollar bonds early are hedging their FX exposure till early redemption.”

Chinese firms have cut foreign-exchange risk by redeeming $2 billion of overseas notes before maturity this year, up from $26 million a year earlier, Bloomberg-compiled data show. Six of the seven companies that called bonds were builders, which had binged on dollar debt amid cheaper rates offshore and restrictive rules on local debt sales. Shanghai-based developer CIFI Holdings Group Co. last week said it would redeem on April 15 its 12.25 percent $500 million notes due 2018.

“I saw an increase in FX hedging business at our bank this year, mostly in basic products such as spot, simple forward and cross-currency swaps," said Andrew Fung, head of global banking and markets at Hang Seng Bank in Hong Kong.

Bank of China Hong Kong has seen more clients taking the initiative to hedge their FX exposure, according to Kera Kong, renminbi strategist at the bank.

Shanghai-based Shui On Land Ltd.’s 2015 net profit fell by half largely due to the impact of yuan depreciation on its U.S. dollar and Hong Kong dollar debt, it said in a statement last week. Two calls to its investor relations department went unanswered.

Hedging Choices

Agile Property Holdings Ltd., based in the southern province of Guangdong, recorded exchange losses from borrowings and convertible bonds of 1.13 billion yuan in 2015, compared with 83 million yuan in 2014, according to its financial results released Wednesday. Maggie Chui, an outside consultant for the company at IPR Ogilvy & Mather, declined to comment.

Some companies find using derivatives too expensive. Modern Land China Co. hasn’t used swap markets to protect against currency risks, said Faye Fang, a Hong Kong-based investor relations officer at the Beijing-based developer. It plans to hedge against currency risks through offshore refinancing because “the cost of foreign-exchange swaps is very high,” said Fang.

One-month implied volatility on the yuan jumped to 5.6 percent from 1.2 percent just before the August devaluation. Fluctuations could wipe out some companies’ full-year profits, according to Zheng from KVB Kunlun.

“The FX hedging business in Asia is virgin territory,” Zheng said. “The higher yuan volatility combined with a slowing Chinese economy makes it harder for companies to make a profit. They are really thinking about how they can better manage their finances.”

— With assistance by Lianting Tu, Molly Wei, and Judy Chen

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